Regulatory practices in insurance industry must evolve with technology

insurance, IRDAI, industry facing tech disruption
Insurance sector regulator IRDAI's groundbreaking reforms empower companies to offer bundled products, and provide customers with enhanced investment opportunities.

The insurance industry is experiencing a technology driven disruption. Insurers and regulators are busy adapting to the changes while ensuring that the market is growing at a steady pace. By launching a new mechanism for processing applications for the registration of new insurance companies, the Insurance Regulatory and Development Authority of India (IRDAI) has initiated a major reform that will ensure growth in the number of players.

China has more than 4 times the number of insurance companies compared with India. Even Singapore also has more insurance companies than India despite having a much smaller population and market size. With the new mechanism to be launched under the IRDAI (Registration of Indian Insurance Companies) Regulations 2000, both foreign and domestic investors can get on-tap insurance licences in India.

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Digital disruption in insurance industry

The digital transformation of the financial services industry has resulted in exponential growth in several sectors such as insurance. Fintech and Insurtech companies have disrupted the financial services industry with innovative products, new payment solutions, digital ecosystems, operating models, and claims settlement processes. Insurance companies have been using RegTech and SupTech solutions in various areas. It would be important from the regulatory perspective to understand the areas where Indian insurance companies use RegTech/ SupTech solutions, what are the challenges in implementing these solutions, and the risks involved in using these solutions.

FinTech and Insurtech players could reshape the relationship between regulators and the insurance industry by using Regtech and SupTech solutions. The industry regulators need to ensure efficient reporting, analysis, market surveillance, and fraud detection. RegTech tools have the potential to improve a financial institution’s ability to meet regulatory demands in a cost-efficient way. There is a growing need for IRDAI to become more tech savvy by adopting digital tools, data analytics, machine learning, and artificial intelligence in its supervisory and monitoring functions.

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Changing operating models

The pandemic accelerated the technology adoption and acceptance not only by consumers, but also by insurance industry. Insurers are being forced to build innovative and tech-enabled products, processes, distribution models, claims settlement systems, employee and agent engagement, and consumer grievance redressal modes. This has underlined the need for the insurance regulator to be futuristic and pragmatic to ensure a healthy, competitive, sophisticated, and consumer-friendly market while improving the last-mile reach of insurance services.

The banking correspondents (BC) have improved banking penetration in the underbanked rural areas as they do not require branches to conduct business. This started sometime in 2006, but was scaled up over the years to make an impact. Insurance agents or insurance advisers have been there for decades, but insurance penetration in rural and underserved population is still very low.

This obviously raises the question whether BCs should be allowed to act as insurance agents? BCs could be allowed to provide insurance services such as selling policies, assisting in making claims, explaining policy benefits, of course after proper training. Insurtech also could offer last mile connectivity for the insurance industry.

The future of insurance industry is not in just selling policies, but in offering comprehensive solutions to consumers. Basic policies that are simple to understand would continue and grow, but there will also be policies that would give value-added services. Health insurance has been focusing on prevention and protection services so as to ensure a low claim ratio. We have seen how global health insurance companies reimburse fitness expenses such as gym memberships, digital fitness classes, health club memberships and wellness expenses. Health insurance companies are also working with tele-medicine companies and doctors to provide protection to policy holders.

Embedded insurance with other products has existed in the past. Mutual fund investment over a particular value could have life insurance policy for a specified period, a car lease could have insurance embedded in it, or home safety devices come with home insurance policies.

The insurance industry has been partnering with external ecosystems such as e-commerce companies to hedge the risk of non-payment of debt, and protect against investment risk. Insurance companies have also been positioning themselves in different ecosystems and on different platforms to provide various services. Insurance business models are evolving and so should the regulation.

(Bahroze Kamdin is Partner, Deloitte India.)